The last quarter shared two similarities with the 1970’s. The presence of inflation and the song ‘Delta Dawn’ hit #1 in 1973. In 2021, Delta Dawn was more of a concern regarding the emergence of a new virus variant. Both inflation and the virus have been positive for investor’s asset prices.
NZ housing market
The inability to travel internationally has seen a massive diversion of funds into other areas of the economy, both here and overseas. Holiday plans may have gone out the window, but people’s desire to spend their money hasn’t.
Housing has been a major benefactor of funds formerly earmarked for international travel, whether through upgrading, buying an investment property or simply home improvements. Spending on property has seen a sharp rise in house prices; building materials price inflation; and difficulty in securing tradespeople. On top of that, there has been the usual flight of Kiwis returning home during a global crisis, except that the flight of returning Kiwis has been significantly larger and faster than during previous global crises.
Because New Zealand is a small nation, it doesn’t take many people returning – on top of ongoing migration - to put pressure on our housing market. This has made NZ one of the most expensive property markets in the world.
New Zealand has an enviable quality of life
However, it is a relatively low-paying economy that is limited in terms of opportunity when compared to major economies like the U.K., Europe, the U.S. or even Australia. This has seen many young Kiwis head overseas in decades past and we will likely see this trend again once global movements finally reopen – COVID or no COVID, especially when the high cost of living which is mostly due to housing costs. And just as the massive influx of these returning Kiwis has added pressure to our comparatively small housing market, it is worth bearing in mind that a reversal in this flow could just as easily cause a significant softening of the local housing market. But such a turn is likely to be some years away.
What’s happening here is happening everywhere
Over the last quarter the New Zealand economy experienced much the same thing as the global economy. The strong economic recovery out of last year’s COVID induced shutdown continued. But just as we experienced here, the spread of the COVID Delta variant caused a drop-in economic activity midway through the quarter across major economies around the world. However, this outbreak appears to have peaked and activity is resuming faster than after previous COVID surges as there is less fear and higher vaccinations rates.
Prices for a wide range of goods and services continued to rise – known as inflation - both here and around the world. This has been a result of continuing supply chain problems, which essentially means that the available manufacturing and transport mediums are struggling to cope with the huge demand for goods. This is partially due to stored-up wealth resulting from the inability of consumers globally to shop during last year’s lockdown, plus new COVID workplace practices slowing the logistics of cross-border deliveries. This has been exacerbated by a massive diversion of funds that were previously earmarked for travel. With international travel off the cards for the foreseeable future, many people have redirected these funds into property related spending and vehicle purchases.
US Personal Savings Rates 2000 - 2020
Making hay while the sun shines
Equity markets continued their upward trend during the quarter, albeit at a slower pace than the quarter prior. Companies are having to pass on price increases because widespread inflation is causing their costs to go up. This may result in a slowing of consumer’s demand for goods going forward, but the present spending by consumers is making for good investment returns.
A new storm is brewing, and it isn’t COVID 19
Those of you with connections to the UK will have heard of panicked motorists forming lengthy queues at petrol stations as pumps run dry in some areas. The UK government insists the country has ample fuel but doesn’t have the drivers to deliver it. It is believed they need 100,000 new drivers to fill the backlog, with the Army having been employed to drive trucks to the bare stations. COVID, Brexit and red tape has seen many drivers return home to Europe, and with an aging driver population, young Briton’s have not been joining the industry.
This is the beginning of a wider pending energy crisis that sees Northern hemisphere nations more reliant than ever on natural gas to heat homes and power industries amid efforts to quit coal and increase the use of cleaner energy sources. But there isn’t enough gas to fuel the post-pandemic recovery and refill depleted stocks before the cold months. Countries are trying to outbid one another for supplies. The crunch will get a lot worse when temperatures drop. The crisis in Europe is troubling for the rest of the planet as the continent’s energy shortage has Governments warning of blackouts and factories being forced to shut. The stage is set for an all-out scramble among Asia, Europe, the Middle East, and South America for shipments of LNG from exporters such as Qatar, Trinidad and Tobago, and the U.S. It used to be that the average person paid little attention to the market price of natural gas. It isn’t like oil, where a snap decision from OPEC will almost immediately affect how much they pay at the pump. This Northern winter, the world is likely to learn how much the global economy depends on natural gas.
Objects may be closer than they appear
While we are very much a forward-looking organisation, the warning that is engraved in the sideview mirrors of cars reminds us to manage risk on an everyday basis. Our ongoing theme of improving the diversification, has proven beneficial and added to returns. We continue to look for more opportunities to reduce reliance on fixed interest investments with interest rates being so low. The outlook for the remainder of the year should continue to be supportive for equity markets due to the amount of consumer spending currently in the pipeline. Nevertheless, uncertainty remains further down the track around whether the current economic surge is a one-off, and when or how a semblance of normality will resume.
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